Canadian dollar rises from two-year low on bets housing sustains

The Canadian dollar (FOREX:CADUSD) rose from its lowest level in almost two years before a report tomorrow forecast to show the pace of home construction in June stayed above the year-to-date average for the second month in a row.

The currency strengthened against the majority of its most-traded counterparts along with those of its commodity-exporting peers after Canadian building permits rose for a fifth straight month. A report tomorrow will show work began on 188,000 homes in June compared with 200,178 the month before, according to a Bloomberg survey of 21 economists. This year Canada has averaged 179,400 new homes each month.

“The data itself is more of a reassurance of the theme of a soft landing that we expect to see in the housing market,” said Mazen Issa, Canada macro strategist at Toronto-Dominion Bank’s TD Securities, by phone from Toronto. “We’ll probably see that filter into the housing-starts data.”

The loonie, as the Canadian dollar is known, rose 0.2% to C$1.0559 per U.S. dollar at 10:58 a.m. in Toronto. The loonie touched C$1.0609 per U.S. dollar July 5, the weakest since October 2011. One loonie buys 94.71 U.S. cents.

Bonds Gain

Canada’s 10-year benchmark government bonds rose, with yields falling six basis points, or 0.06 percentage point, to 2.59% from 2.55% July 5, a two-year high. The 1.5% security maturing in June 2023 added 52 cents to C$91.41.

The Bank of Canada will auction C$3.4 billion ($3.2 billion) of five-year notes with a coupon of 1.25% on July 10.

Futures on crude oil, the nation’s largest export, fell 0.5% to C$102.76 per barrel and the Standard & Poor’s 500 Index of U.S. stocks gained 0.6%.

Canadian building permits’ surprise increase in May was the fifth straight month of gains, the longest stretch in almost a decade, led by a jump in multiple-unit housing work in Toronto that has sparked warnings from policy makers about overbuilding. The value of municipal permits rose 4.5% to C$7.32 billion, following a revised 11.2% rise in April, Statistics Canada said today in Ottawa.

Statistics Canada will report its home-price index data for May July 11 while Ottawa-based Canada Mortgage & Housing Corp. issues the housing-starts report tomorrow that is forecast to exceed the annual average.

Housing Trend

“That would be a pretty good number,” said Don Mikolich, executive director of foreign exchange sales in Toronto at Canadian Imperial Bank of Commerce. “A shovel in the ground for tomorrow is probably the most important number.”

Bank of Canada officials have said there are signs of a “constructive evolution” in household finances after a surge in home starts and re-sales fueled by rising consumer debt. About one in 10 Canadians households are highly indebted, with borrowings exceeding 250% of gross income, the central bank said last month.

The cost to insure against declines in the Canadian dollar versus its U.S. peer rose for a second day from its lowest level in two weeks. The three-month so-called 25-delta risk reversal rate reached 1.6350, after hitting 1.6125 July 4, its lowest level since June 20. Risk reversals measure the premium on options contracts to sell Canadian dollars versus buying U.S. contracts that do the opposite.

The Canadian dollar has risen 0.3% this year among nine developed nations currencies tracked by the Bloomberg Correlation-Weighted Index. The yen has led decliners with a 9.3% drop and the U.S. dollar had biggest increase at 7.5%.